SBA Draws Flak Over Big Contractors’ Share of Awards

By Sam SkolnikBloomberg
March 30, 2017

New
Small Business Administration (SBA) chief Linda McMahon soon will be facing a
question that goes to the heart of the agency’s mission: Are smaller federal
contractors getting their fair share of contract awards?

The SBA
in recent years has touted the successes of its “goaling reports” and
“scorecards” — measures by which it monitors whether federal agencies have met
their obligations to dole out at least 23 percent of prime contract awards to
small businesses. The federal government in 2015 reached its small-business
contracting goals for the third consecutive year, according to a
2016 SBA report.

However,
the SBA faces a wide range of skeptics who claim that the methodologies the
agency uses allow it to fudge the percentage of contracts small businesses win
from the federal government.

McMahon,
the former CEO of World Wrestling Entertainment, will be addressing the issue
on a number of fronts over the next few months.

Congress
is set to hear from McMahon directly at an oversight hearing slated for next
week, and may raise the issue in new legislation.

The SBA
is preparing to release its next small-business goaling report so the public
can see whether government agencies are reporting that they’re meeting their
small-business targets. At the same time, agency leaders will be working to
address the chronic concerns from the SBA Inspector General’s office, which has
taken the agency to task on the topic in each of the past 10
years.

And
none of this is to mention the ongoing lawsuit filed by the American Small
Business League (ASBL), a persistent SBA critic, which is demanding that the
courts issue an injunction to revise how the agency counts which contracting
businesses are actually “small” and which aren’t. The case was dismissed in
federal district court on jurisdiction grounds, but ASBL officials said they’re
confident their appeal will succeed.

It’s
unclear whether the change in presidential administrations will result in a
rethinking of small-business contracting policy, Charles Tiefer, a University
of Baltimore School of Law professor helping the ASBL with its case, told
Bloomberg BNA.

“Nobody
knows what the new head of the SBA is going to do,” Tiefer said. “Maybe she’ll
decide to wrestle with the Lockheed Martin types. We just don’t know.”

Defending
Small Contractors

An SBA
spokeswoman declined to shed light on McMahon’s plans, including whether she
plans to tinker with the agency’s goaling methodologies. SBA watchers likewise
said McMahon’s contractor-related aims remain unclear.

During
her Jan. 24 Senate confirmation hearing, McMahon said she looked forward to
serving as an advocate for small contracting businesses, so that they “really
have that fair shot” at winning contracts over larger competitors. But she
provided few details as to how she might accomplish that goal.

That
may soon change. The House Small Business Committee will be holding its first
oversight hearing with McMahon on April 5, Kelley McNabb, the committee’s
communications director, told Bloomberg BNA.

Small
contractor goaling has been a persistent issue in previous hearings and will
likely be raised again next week, a committee source said.

The
panel also is likely to pursue legislation to address the issue, at least
around the edges. A bill co-sponsored by Committee Chairman Rep. Steve Chabot
(R-Ohio) and the panel’s ranking member, Nydia Velazquez (D-N.Y.), last session
would have revised the Small Business Act to increase prime federal contracting
opportunities for small-business concerns.

The
bill died in committee, but certain sections were rolled into the 2017 National
Defense Authorization Act. There’s a strong chance that the parts of the
previous bill that didn’t find another vehicle may again be put forth this
year, the committee source said.

The
reason for the renewed effort is clear, Chabot told Bloomberg BNA in a written
statement. “Federal dollars are a limited resource,” he said. “Awarding
ineligible firms federal contract awards means eligible small businesses do not
get those contracts.”

‘Widespread
Misreporting.’

There
is no evidence of “substantial intentional misrepresentation” among federal
agencies, an SBA spokeswoman told Bloomberg BNA in a written statement.
Anomalies are more likely caused by human error, she said — an understandable
occurrence, given that thousands of contracting officers enter data about
contracts, including contractor size, millions of times per year.

Yet,
reports from various agencies “have shown widespread misreporting by procuring
agencies, since many contract awards that were reported as having gone to small
firms have actually been substantially performed by larger companies,” said the
SBA IG’s annual report, issued
last October, on the most serious “SBA management challenges.”

The IG
has used similar language in management challenges reports since at least 2007.
The watchdog, over the past decade, requested that SBA make several changes to
improve the accuracy of its goaling and scorecard reports, many of which the
agency has made.

The SBA
should focus on modernizing its information systems and improving data
integrity, acting SBA IG Hannibal “Mike” Ware told Bloomberg BNA in a written
statement. That would “greatly enhance the ability of both SBA and contracting
officers to perform their respective responsibilities,” he said.

‘Deceptive
Practice.’

An ASBL
injunction request filed last year is the most direct ongoing attack on the
SBA’s goaling process. Although a judge with the U.S. District Court for the
Northern District of California dismissed the request in October on
jurisdictional grounds, the ASBL has appealed the case to the U.S. Court of
Appeals for the Ninth Circuit.

The
ASBL is asking the court to issue an injunction that bars the SBA from
excluding any prime contract when calculating the value of contract awards. The
injunction would also prevent the agency from including contracts that were
awarded to businesses that aren’t “small” as defined by law and regulation,
when calculating the value of prime contracts awarded to small businesses.

The SBA
asserted in a press announcement last April that small-business contracts
awarded in fiscal 2015 accounted for 25.75 percent of the total for all prime
contract awards. However, in that fiscal year, SBA characterized 151 Fortune
500 companies as “small businesses,” according to the ASBL
suit.

The
suit contends that the SBA excludes the small-business prime contracting award
numbers from 27 agencies, including the CIA, the Federal Aviation
Administration and the Supreme Court, as well as contracts that are performed
outside the U.S. These excluded contracts make up a significant portion of
federal spending, the suit contends, meaning that the figures SBA releases
aren’t accurate and reflect a form of “creative accounting.”

“Using
this deceptive practice, the SBA has, for years, been able to boast that the government
has attained or exceeded the 23 percent minimum goal,” the suit says.

Judge
Vince Chhabria didn’t address the substance of ASBL’s claims in his three-page
opinion Oct. 18. The judge found that Congress, but not the courts, could
mandate the types of changes the ASBL seeks.

“If the
Small Business Administration is giving Congress bad information, then Congress
can do something about it, either in an oversight or legislative capacity,”
Chhabria wrote.

The
baseline facts illustrate that their case has merit, Tiefer and ASBL President
Lloyd Chapman told Bloomberg BNA.

There
are gray areas of the law, Chapman said, “but my lawsuit is about policies that
are clearly illegal.”

Priority
Attention

The SBA
was created to enforce the Small Business Act of 1953, which was designed in
part to ensure that a reasonable percentage of federal procurement contracts
were awarded to small businesses, as well as small enterprises owned by women,
minorities, veterans and others through set-aside programs.

The
Government Accountability Office (GAO) has urged the SBA for more than a decade
to address flaws it has recognized in the system.

The GAO
in a May 2003 report
studied five large companies that received $1.1 billion in federal contracts,
including $460 million designated as “small business awards.”

A
significant cause for the misreporting is that federal regulations generally
permit companies to be considered small businesses over the life of the contract
— even if they grow, merge with another company or are acquired by a large
business, the GAO found.

‘There
Was Confusion.’

Small-business
government contracting is one of the most important functions of the SBA, the
agency spokeswoman said.

There
is “no evidence” that substantial intentional misrepresentation is occurring,
she said. “Instead, the anomalies are more likely human error (thousands of
contracting officers entering millions of actions each year) or
recertification, i.e., a small business may legitimately win the competition,
but may subsequently be acquired during performance,” she said in her
statement.

The
agency could not comment on the ASBL suit because it’s ongoing, the spokeswoman
said.

She
declined to comment on whether SBA anticipates any changes in how it tabulates
its small-business goaling reports under McMahon — or whether the agency may
alter its mission as it pertains to federal contractors more generally.

“I
never thought during my time at SBA that there was any conspiracy,” A. John
Shoraka, a former SBA associate administrator for government contracting and
business development, told Bloomberg BNA. “There was confusion.”

Shoraka,
who left the SBA in January after a five-year stint, said the rules aren’t as
clear as they could be on when companies need to recertify as larger
businesses. Contractors don’t follow them “100 percent of the time,” he said.

But the
goaling reports are more reliable now than they’ve ever been, said Shoraka, now
managing director for PilieroMazza Advisory Services. Referring to the reports
issued during his tenure at the SBA, “I think these were the cleanest numbers
in the history of these goaling reports,” he said. “We worked very hard to get
these numbers clean.”

‘The
Fundamental Question.’

The SBA
has no “sticks” at its disposal — no legal or regulatory remedies — when
agencies admit they’ve failed to meet their small-business contracting targets,
Shoraka said — as happened in 2015, when the Department of Energy said that
just 5.4 percent of its contracts were awarded to small businesses.

Instead,
“when you get a bad report card, we’re going to drag you before Congress and
call you out,” Shoraka said.